Long Term-Care Policies Bite Genworth Again

Genworth Financial Inc.’s old long-term-care policies have come back to bite the company yet again.

Genworth shares were off 13% in recent trading as investors reacted to the news that the company would review—one more time—its oldest blocks of policies that help consumers pay the costs of nursing homes and in-home care.

Genworth CEO Thomas McInerney

Bloomberg News

These blocks of business date back decades. Back in the 1980s and 1990s, many insurers saw long-term-care policies as one of their most-promising products. The policies appeal to many consumers as way to get afford high-quality nursing homes and home-based health care, rather than relying on Medicaid.

But in pricing the policies, insurers underestimated how fast medical costs would rise, and how many seniors would actually use the benefits. As a result, many once-prominent sellers of long-term-care insurance have sharply reduced sales or exited the business line entirely.

Genworth is one of the remaining dominant players in the industry, not giving up on it like so many peers. It has raised prices sharply and overhauled the products to make new versions more profitable, while seeking regulators’ permission for premium increases on the older policies that are still in effect.

Still, its second-quarter results, released Tuesday afternoon, “fell a significant $41 million below expectations reflecting $45 million of sequential reserve strengthening due to higher incurred losses on new and existing claims” in the long-term-care business, Morgan Stanley’s Nigel Dally wrote in a note to clients.

“Management intends to do another reserve analysis ahead of third-quarter results, where they caution of a likely change in assumptions, which may potentially drive a meaningful increase in reserves,” he said.

Amid the news of the latest reserve analysis by the company, Genworth stock fell 13% to $14.12 Wednesday afternoon. The stock had been up about 5% for the year before the news hit. It’s now down 9% year-to-date.

In an interview Wednesday, Genworth Chief Executive Thomas McInerney said that it is “very clear to me, in general, there is a very negative view of long-term care and I get that, and certainly the experience up until now” hasn’t been good.

But he added, “I do think they’re overweighting this issue,” given the many price increases the company has made and the changes to a new generation of policies to make them profitable.

Only a dozen or so companies still sell meaningful numbers of policies, down from about 100 a decade ago, according to consultants and regulators. In the past decade, sales to individuals have fallen sharply, as companies raised prices and reduced the potential payouts.

Most of the actuarial assumptions made by insurers years ago turned out to be overly optimistic. Underestimating how long elderly policyholders would live –and collect benefits as a result – is one of the major reasons that older policies have proved problematic.

Another problem is the protracted low interest-rate environment. Long-term-care insurers bank on investing the premiums that are paid annually. It can be decades before a buyer actually files a claim.

Genworth has been seeking rate increases averaging more than 50% to stave off more losses in its oldest policies, and in an earnings conference call Wednesday it said it has obtained approval for increases of some sort or another from more than 40 states so far.

Among other changes in how Genworth sells the product, it started requiring blood tests and other medical screening, which the industry generally hadn’t done before.